What are we really dealing with here? First of all, the system is suffering through the breakdown in contemporary "Wall Street finance." As wrenching and destabilizing as it continues to be, this process should be differentiated from outright financial collapse. Confidence in Wall Street "money" (their previously perceived safe and liquid securities/instruments) has been shattered. Myriad sophisticated Credit instruments have been discredited and thus will no longer provide a viable mechanism for system Credit expansion. Importantly, however, confidence has been sustained for system "money" more generally.

As I’ve noted in previous writings, analysts made a momentous blunder earlier this decade when they mistook the collapse of the technology Bubble (and attendant recession and corporate debt problems) for the onset of "deflation." Reflationary policymaking without regard to the nature of inflationary consequences proved disastrous. We’re about to repeat this error…..

The Government Finance Bubble is enormous and powerful - and should be anything but underestimated. Akin to the previous Bubble in Wall Street finance, the epicenter of this Bubble is here in the U.S. But I would argue that this unfolding Bubble dynamic has greater potential to engulf the entire world than even U.S.-style mortgages and derivatives did starting back around 2002. Welcome to the new world of synchronized stimulus, deficits, and reflationary policymaking. I don’t believe true systemic deflation (as opposed to collapsing asset Bubbles) is a high probability scenarios as long as the Government Finance Bubble is rapidly inflating. All bets are off, however, if confidence in government debt falters. The worst case scenario – that should be avoided at all costs – is a massive inflation of government claims that sets the stage for a devastating bust…..

The public sector is now essentially on its own when it comes to stoking this bout of reflation. Moreover, it is being called upon after a couple of decades where private-sector Credit grossly inflated home prices, securities values, various other asset prices, household incomes, consumer borrowing and spending, corporate profits, and government receipts and expenditures. The Government Finance Bubble is being called upon to reflate with little assistance from private Credit, while at the same time it is faced with a Deeply Maladjusted Economic Structure still overly dependent upon inflationary Credit expansion. Throwing mega-Trillions at our distorted economy is just asking for trouble.

It is in this context that I fear that the Trillions of Government Finance spent to save the world from "deflation" will, in the end, require perpetual needs for Trillions more. There will be no kick-starting asset Bubbles or a return of private-sector Credit excess. Instead, it will be a case of throwing repeated doses of government-directed finance/purchasing power at the system. Temporary but fleeting economic boosts will then require only stronger doses of artificial stimulus.

We’ve commenced a new cycle dominated by government electronic printing presses in all their various forms. The inflationary consequences will be a different variety than we’ve grown accustomed to from previous reflations. But the bottom line is – and there’s ample history to support this view – that once the "printing presses" get humming along it’s going to be darn difficult to slow them down.

Doug Noland is a market strategist at Prudent Bear Funds. Their website is www.prudentbear.com.